My Long History with the Atlanta Braves

There is not a great deal of new information to report for the month of September 2019. Although the markets were extremely volatile during the month of September, the upward trend remains intact. It seems like every headline was filled with someone or another forecasting a recession just around the corner. Also, the headlines were full of political news due to the upcoming 2020 Presidential election. While presidential elections should, in my opinion, have absolutely no impact on financial markets, they almost always do. 

Since there was not a whole lot going on financially, I would like to relay my history with the Atlanta Braves. The Atlanta Braves are currently in the playoffs and at this writing no one knows what the outcome will be. However, I became a season ticket holder in 1989, so this marks the 30th year of my participation. Over that time, as you will read later on, there have been many ups and downs throughout my attendance. 

Ava's first baseball game

Before I get to the more interesting part of this posting, I must report the financial results for the month of September. For the month of September, the Standard & Poor’s Index of 500 stocks was up 1.9% for the month. For the year 2018 through September, that index is up 20.6% and the three-year performance is 13.4% and the ten-year performance is 13.2% annually. The NASDAQ Composite was barely positive, up 0.5% for the month, up 21.5% for the year 2019 and up 15.9% three-year period then ended at a 15.5% for the 10 year annual returns. The Dow Jones Industrial Average was the winner for the month at 2.1% and that index is up 17.5% for the year, 16.4% for the three-year period and 13.6% for the 10 year period. Just to form a comparison, the Barclay’s Aggregate Bond Index was down 0.6% for the month, but is up nicely for the year 2019 at 8.4%. For the three-year average it is up 2.9% and for the 10 year average it is up 3.7%. Even though bonds are having a very respectable 2019, the ten-year returns are roughly one-third of what any of the major market indexes reflect.

One of the most important components of understanding gross national product (GNP) in the United States is to realize how it is calculated. Over the last three decades the U.S. economy has shifted from a factory environment to more service-oriented. As a matter of fact, the service index greatly outweighs the manufacturing index, and more importantly, consumption or consumers themselves represent roughly two thirds of the calculation of the GDP. It seems that the U.S. was perfectly willing in the 70’s and 80’s to allow manufacturing to lead the United States overseas. China was the major benefactor of that transfer of manufacturing and since they had more favorable labor rates than the U.S., the U.S. government was perfectly willing to take that over. Now we want it back!

There is no question that the U.S. is dominant when it comes to services, and certainly dominant when it comes to technology formation, but the real challenge is trying to determine without manufacturing exactly which way the economy is going. The last several months we have seen major swings in the equity markets based on assumptions from others that the economy is either moving ahead or moving down. As I have pointed out in these writings before, the most important component by far in calculating the trend of the market is the number of actual people working. If you have a job and you support your family, you will consume. You will pay for food, transportation, and even some entertainment. The more people working the more people will add to the economy. The most important function that any government can do is to keep American workers at their jobs. It seems 2019 will be a record in every regard when it comes to employment.

Josh and Carter Roberts are engaged! Wedding plans are underway for next summer!

On Friday, the government announced that the jobless rate in the United States had reached 3.5%, which is the lowest unemployment rate in this country in 50 years. Just let that information sink in for a second. There are more people working in the United States now than ever in its history. Yes, the unemployment rate was lower previously, but the number of Americans has increased dramatically over the last 50 years and now more people are working than have ever worked in this country before. Given the outrageous political exclamations that you see on the news every day, do you not find it comforting that so many people now have jobs and employers are actually seeking more employees than are available? 

You really have to read a report on the unemployment rate to understand how wonderful the news was. In this report for September, the unemployment for workers with less than high school diplomas dropped to 4.8%. Think about that just for a second; workers below college level now reach a rate of 4.8%, which by definition is below the perceived full-employment rate of 5%. Even more good news was that joblessness among Hispanic men declined to 3%. This level of unemployment by Hispanic men was the best on record tracing back to 2003. Therefore, the number of employed with less than a high school diploma is the best that has ever occurred since 1992, when the labor department first began reporting this index. The Hispanic rate is the best since 2003. 

One of the true indicators of a good economy is how broad the employment was. So many politicians argue that the workforce is tilted toward the rich and not the everyday workers. As you can see from this employment report, employment is strong throughout the workforce, including Hispanic workers and the less educated. 

I guess I get somewhat weary about discussing the economy when you see such tremendous coverage given to unimportant economic facts. Just last month we were awakened to the realization that Iran had used drones to bomb the refining manufacturing plant in Saudi Arabia. Suddenly, the price of oil jumped up 10% despite the U.S. buying virtually no oil from Saudi Arabia. As the price of oil went higher, the equity markets went lower under the fear that the U.S. would initiate war with Iran. Many of the forecasters on television espoused the military prowess of Iran without bothering to check the facts. Surely, if the United States would enter into a prolonged war with Iran the price of oil would double, and the economic effects would be crippling.

First off, we do not buy oil from Iran, nor have we for decades. Secondly, our consumption of oil from Saudi Arabia is very low. But most importantly, the Iranian army is not much of a threat. They barely have an Air Force that flies and few Navy armaments. Do you realize that the economy of Iran is not even as big as the GDP of the state of Georgia? During this month, I heard a military assessment of the Iranian military indicating that it would take maybe one full week to take out all of their military installations. But none of us want war with anybody, including Iran. Their economy is in complete disarray, they are controlled by a dictator and their own people hate their government. Isn’t it interesting that everyone wants to come to the United States, but hate us so much? 

Partner Danielle Van Lear with Josef Martinez of Atlanta United

I read an article this month about the nuclear financial bomb that the Chinese could deploy against the United States. Not a nuclear bomb in the form of nuclear energy, but a nuclear bomb in the form of debts. Several prognosticators say that if China really wanted to hurt the United States that they could just drop all of their U.S. Treasury holdings in one fell swoop, destroying the U.S. economy in the process. Once again, do these people even do any research?

Yes, it is true that the Chinese hold roughly $1 trillion in U.S. Treasury Bonds, but do not forget that there is currently $22 trillion in U.S. government debt outstanding and, actually Japan holds more than China at a little over $1 trillion. However, 70% of the U.S. Treasury debt outstanding is actually held by the U.S. government itself. For many years the Social Security system has bought treasury bonds with its excess Social Security payments that it receives through tax withholdings. So, even if China were to sell all of their bonds in one sitting, it would hardly affect the price of U.S. Treasuries given that it represents only 4% of total outstanding bonds. Further, the Chinese realize that selling these treasury bonds would create a huge swing in their currency by strengthening it by virtue of selling U.S. dollars and buying local currency. The last thing the Chinese want to do is strengthen their currencies, making their export prices expensive and, therefore, their manufacturing less competitive in the world markets. You can forget about that fear.

Once again, the issue with Russia this month came up and what effect Russia would have if they tried to pursue further aggression in Eastern Europe. I almost laugh when people on television use this as a reason for the markets going down. I only need to remind you that Russia has GDP that is actually less than the country of Italy. I don’t think anyone is afraid of Italy and certainly no one accuses them of working too hard.

So we morph into the political arena of the potential impeachment of the President of the United States. Once again, a headline that means absolutely nothing in the whole scheme of things. While it is possible that the House of Representatives could impeach the President of the United States since the Democrats have majority, an indictment in the Senate would require a vote of two-thirds of the members and, since the majority of the Senate is held by Republicans, that is not a reality. So why are we spending all of these hours of talk and discussion over something that clearly could not possibly take place? In my mind, it has more to do with the fact that Congress is frozen with inactivity. They cannot pass even the most simplest of bills since they spend all of their time on conspiracy theories. When will Congress actually do what they were elected to do so we can move on with the country’s business rather than this silliness? Isn’t there an election next year?

There is no question that the President is a lightning rod for virtually all Americans. However, it must be said that he has accomplished many of the goals that he laid out in the campaign by reducing unemployment, being tough on immigration, and holding other countries accountable for their excess of unfair trade with the United States. In doing so, he has offended virtually everyone; which is okay with me. I think comedian Dennis Miller may have put it better than anyone else when explaining about current President Trump. As Dennis Miller said, “The simple fact is that if Trump was vaguely presidential, he wouldn’t be President”. I think that pretty much explains the situation. With the fabulous economy we enjoy today, the Democrats fully realize that they are not likely to beat this President at the polls so they must distract the attention of the public away from the economy. 

So, my new worry is if Senator Elizabeth Warren were to win the democratic nomination and the Presidency, what effect would it have on the markets? Remember, she has openly wanted higher marginal tax rates, hikes in capital gains rates, and a higher tax on dividends. In addition to all of that, she wants a wealth tax on the richest people with a net worth more than $50 million. The net effect of higher taxes is to take money out of the pockets of consumers and turn it over to the government to allocate. Maybe that would be better, but not according to the economics books I read. 

Medicare for all sounds attractive on paper, but consider how it would be run. The government does virtually nothing better than the private sector except defense. If you want your health program run by your local DMV, that’s where it ends up. I cannot even fathom that being a logical solution for most voters.

Regardless of what you hear in the financial news, the economy is still doing well. Surely there have been pockets of weakness but with the Federal Reserve now cutting interest rates and with the lower tax rates that are currently enforced, it would certainly not surprise me to see earnings actually up in the fourth quarter on a year-by-year basis. In summary the three components of higher stock prices are firmly in place. Interest rates are low and getting lower, earnings are high and stable, and the economy is strong and resilient and is likely to remain so for two years to come. Based on that trifecta of positive economic news, we expect equity prices over the next year to be higher than they are today. 

I had to force you to read all of the updated financial information to get to the entertaining part of this posting. My history with the Atlanta Braves goes back, in many cases, before many of you were even born. I never started out to be a huge baseball fan; it just seemed to fall into my lap and has become an integral part of my past and hopefully future.

When I was attending Georgia State University to get one of my three graduate degrees, I did so at night after work. At that time, I was single and really had nothing else to do, so after school I would drive over to the old Atlanta Fulton County Stadium and park right outside the main entrance. In those days it was not uncommon that they would only have 3,000-4,000 people at a game. I would buy a General Admission ticket for $2, or oftentimes it would be so late when I arrived that they would not be collecting admission. You could go in the general admission part of the stadium, walk around and sit directly behind home plate since those seats were rarely used. I watched many games during the 1972-1976 Hank Aaron era. I would conservatively say I probably saw Hank Aaron hit 100 of his 755 homeruns during that time. The Braves rarely won, but I admired the ability of certain members on that team.

Josh, age 2, enjoying the Braves (1997)

Josh, age 3, at a Braves game (1998)

My real participation started in 1989. As many of you know, I had a long history with the former WTBS announcer Craig Sager. Not only did Craig and I have the majority ownership in the sports bar Jocks & Jills, we also had a long personal relationship before he died a few years ago. Craig had a difficult personality in a lot of respects. He was sure he knew everybody, and he could open doors no one else could open. In 1989 Craig agreed to buy four season tickets on the second row behind the dugout at Atlanta-Fulton County Stadium. The interesting part of that story is that while he agreed to buy them, he never had any intention of paying for them. When the invoice came due, he forwarded it to me since he thought maybe I would enjoy having them. At that time, four season tickets to the Atlanta Braves was outrageously expensive and clearly, I did not feel like I could afford them. However, since they were good seats and since Craig Sager had arranged them, I went on and purchased them. During those days the Braves were not very good, and I could hardly give the seats away. Who would have ever thought that in 1991 the Braves would go from last to first place and go to their first World Series game? 

Due to these season tickets, I was honored to go to the World Series in 1991, 1992, 1995, 1996 and 1999. How many people can boast that they have actually attended World Series games in five years during the 1990’s decade? I was even there the night that Atlanta won the World Series in 1995. Tommy Glavine pitched a shutout and David Justice hit a homerun that won the series against the Cleveland Indians. I was there when they won 17 straight division championships; it has been a good run.  

I have seen many interesting things and being with the Atlanta Braves has played a major part in the upbringing of my children. The first time I can recall taking Josh to a game was the September 30th, 1997 playoff game with the Houston Astros. At that time Josh was only 2 years old and as you can see from the picture, he fell asleep shortly before the first pitch. Later, when he regained some knowledge of what was going on, I thought it might be interesting if I got him a baseball from the field. I had come to know Braves shortstop Jeff Blauser quite well, so as they were coming off the field, I motioned to Jeff to throw me a ball so I could give it to Josh. When he did, I handed it to Josh to which he immediately threw it back at an unsuspecting Jeff – luckily he dodged it in time. I still have that very baseball in my office. 

I was also there in July of 1993 when the press box caught on fire. As you can see from the picture I took that night, it was quite an event and the game was delayed for a couple hours before finally putting out the fire. 

Press box on fire 1993; David Justice and Deion Sanders

I was also there during the World Series in 1992 when Deion Sanders played for both the Atlanta Falcons and Atlanta Braves during the same season. Quite a media storm occurred when Deion would leave the Atlanta Falcons practice field and fly by helicopter to Atlanta Fulton County Stadium so he could play in the World Series. I was also there when they traded Deion Sanders to the Cincinnati Reds and completely destroyed the morale of the team that year. Deion was a huge fan-favorite, but not until later did we find out that behind the scenes he was very disruptive to the team and not the type of player Bobby Cox was used to coaching. 

I was also there for the very last game in Atlanta-Fulton County Stadium, which was an eerie experience. Even though that stadium was clearly a dump by any standard, it was all I really knew when it came to professional baseball. It was pretty crazy to see the players come on the field at the end of that game, with David Justice walking around the stadium with his handheld camcorder to memorize the event for himself. As you know, in 1996 the stadium was imploded to make room for the new Turner Field which would be used in the 1996 Olympics.

Moving over to Turner Field, we had exactly the same seats and went through many memorable events there as well. I was there in 2000 when Sammy Sosa bounced homeruns off the 755 Club as he won the Home Run Derby. Looking back on the event, it should have been self-evident to everyone that steroids played a large part in his success given that those shots were well over 500 feet. The 2000s were not as successful for the Braves, but many of my clients were able to use those tickets since we have sold them to them for half-price for 30 straight years. Many interesting things happened during the 2000’s, but we never reached the success that we had in the 1990s. I even got to throw out the first pitch at Turner’s Field in 2005.

One memorable event that did happen at Turner Field was that of an unfortunate foul ball. Despite having tickets for 30 years now, I have never once actually caught a foul ball. It really could be said that I have never even been around a foul ball. They have been hit in my area, but I never really had a shot at catching one. I have been given over 100 balls by players coming off the field, but a foul ball, I have never caught. 

In 2016, Dakota, Josh, and I took Ava to a Braves game. At that time Ava was about five years old. At some point during the game, a ball ricocheted off the dugout and actually hit Ava in the arm. Josh and I are both large people, above 6’4 in height, so the fact that a foul ball could find her between the two of us was quite remarkable. She was not badly hurt but, as you would expect, the medics quickly rushed to her to make sure no damage was done. It definitely made a lasting impression; her explanation when asked to go to any games after that was “Daddy, football hurts”. That led us to change seats at the new SunTrust Park. Now we have seats adjacent to the home plate on the eighth row; close enough to see the action, but behind a protective screen. Yes, we were there when Ronald Acuna, Jr. had a Grand Slam against the Dodgers in the 2018 playoffs. This team is exciting, but I guess it really makes no difference. I intend to be a season ticket holder for the next 30 years and whichever team they field, I will be there. 

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email. 

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

Don't Let the Machines Lie to You - Trust the Fundamentals, Not the Hype!

Back when I wrote the blog on November 6, 2018, Everyone loves a great conspiracy theory, I have one…, I really did not have an answer to the market’s volatility. I suspected (and expressed so in the blog) that there were forces creating the volatility that made no sense and certainly did not represent the fundamentals of the U.S. economy. I was not given the answer until December 26, 2018, the day after Christmas, when the Wall Street Journal published information that supported the theory that I had previously proposed.

Yes, it was a very disappointing year from virtually all financial aspects. Even though the U.S. economy was strong and continues to express strength going forward, the major market indexes finished negative for the year. And yes, I recognize that this negative performance was well below my forecasted gains for 2018. I believed then, and I believe now, that the fundamentals were very strong and will continue to be strong into 2019. What I did not adequately forecast, nor had any reason to believe, is that the machines would spoil our Christmas season by creating losses that were unwarranted by the fundamentals. Hopefully, I can explain all of this to you in this blog, not in the spirit of sour grapes, but rather as an educational process to learn more about how the markets react to given conditions rather than react to basic fundamentals.

Lucy & Harper Wilcox with Santa

Robby, Danielle, Caroline & Reid Schultz

On a seasonal basis, the period of time from November through May of any given year is historically supposed to be the best time of the year to invest. That is particularly true for December, mainly due to pension funds reallocating their assets and putting money into plans to meet their year-end funding requirements. For that reason, it is particularly unusual to see such a huge draw down in the markets for the month of December.  

In fact, it is now said that December 2018 was the worst December in the equity markets since 1931. To really understand how absurd that comment is, you would have to compare the economics from today with those from 1931. This year, we are enjoying 3.7% unemployment, while in 1931 and 1932 the unemployment was 15.82% and 23.53%, respectively. GDP in 2018, the difference in those numbers is not even close. It is anticipated for the entire year of 2018 that the GDP will grow roughly 3%. In 1931 and 1932, the GDP was -6.5% and -13.1%, respectively.  

So, in 2018, we had truly extraordinarily high growth numbers and low unemployment, while in 1931 and 1932 we had huge unemployment numbers and negative growth. To assume they are even comparable certainly creates a conundrum in my mind.

As I scan through the financial advertising that you see on the internet, I am always baffled by the headlines that attempt to scare investors into investing in safe products by stating that stocks could go down 75% next year. As I read those advertisements, I reflect on the fact that over the last 16 years the market has only been negative two times. If you do the math, that is a win rate of close to 88%. Given the chart, where the compounded annual rate of return over the last 16 years has been 8.96% and the average at 10.33%, I always wonder why clients have such fear of the equity markets. Clearly, over this timespan, no asset class has even come close to performing as well as equities.

After an outstanding year in 2017 with the S&P 500 up 21.8%, I guess you could expect a pullback in the performance. This really happened with vengeance in the fourth quarter of 2018. There is nothing good to say about this performance since several of the indexes fell into bear market territory and a selloff occurred in all asset classes. The Standard and Poor’s Index of 500 stocks ended the year down at 4.4% for 2018. The NASDAQ Composite ended the year down 2.9%. The Dow Jones Industrial Average was down 3.5% for 2018. Since the 2018 numbers and the one-year period are identical, you end up with exactly the same numbers for the one-year period then ended. If, however, you stretch out to the three-year period, the S&P ends up with an annual return of 9.3%, the NASDAQ Composite up 11.1% annualized and the Dow Jones Industrial Average up 12.9%. Just for the purpose of comparison, the Barclay’s Aggregate Bond Index was exactly even for 2018 and has only realized a 1.9% annualized gain over the preceding three years.

As pointed out previously, the markets have only been down twice over the last 16 years. However, the fear expressed in the financial publications would lead you to believe a much higher percentage of losses. As indicated in the chart above, do not be misled by the hype, but rather evaluate the actual numbers and see that over the last 16 years you had an 88% chance for profits.

Needless to say, I was really disappointed to see the markets sell off during the final quarter of 2018. At the end of the third quarter, the market was up a sterling 10.6% and it looked like we were on track to have another great investment year. However, in the first of October, the Federal Reserve Chairman gave a speech that rattled the markets. In his speech, he indicated that he would like to bring interest rates up to a neutral level. And what really rattled the markets was when he said, “We’re a long way from neutral...” At that point, despite the very positive fundamental aspects of the U.S. economy, the markets sold off indiscriminately. As I then pointed out, I was not exactly sure why the market was going through such huge swings, but now we have an answer.

In an article published on December 26, 2018, the Wall Street Journal quoted the following: “Behind the broad, swift market slide of 2018 is an underlying new reality: Roughly 85% of all trading is on autopilot – controlled by machines, models, or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast.” So, as my post on November 6th was speculating, there was in fact a true conspiracy theory that was affecting the markets. I highly recommend that you read this article and others on the subject. It is very important to understand that this type of trading has nothing whatsoever to do with fundamentals, but rather momentum. So, when we had the original sell-off at the beginning of October 2018 with a sharp move down due to the Chairman of the Federal Reserve’s comments, the program machines kicked into action trading on the momentum. As the Wall Street Journal quoted, “When markets turn south, they’re programmed to sell. And if prices drop, many are programmed to sell even more.” 

So, as I suspected during this time of high volatility, we were seeing massive program trading affecting the market rather than there being some actual fear of recession or any other type of financial concerns in the economy. As I expressed in the blogs during that timeframe, there clearly just was not any type of reasonable fear for recession in 2019 and all other major fundamentals of stock market investing continued to be strong. I guess I have to admit that this type of program trading clearly interrupted what would have been otherwise a fabulous investment year and scared our clients into believing that something more dangerous was at hand. Remember that the machines do not trade based on fundamentals; they trade based on momentum. Since momentum and direction were down in the fourth quarter, huge sell programs overwhelmed the market that had low volume and participation during the holiday season and created huge swings both up and down, but the upside was much less regular.

Another thing that really irritates me about the performance in 2018 is that I was not wrong. I correctly assessed the economy and correctly evaluated all of the components of higher stock prices and reported them to you. What I did not and cannot project is how the machines will react to current information. You cannot reason with a machine – it trades because it is programmed to do so, not because of the strong fundamentals of the economy. However, with that said, it gives me a new opening to project strong earnings for 2019. 2018 was a year when interestingly cash exceeded the performance of all other asset classes. That has actually only happened four times in modern history.  

CiCi and Ava on Christmas morning

It is very rare indeed that both bonds and equities would fall in the same year, but 2018 was that year. Interestingly though, when you have that unusual circumstance of cash outperforming other market indexes, it bodes well for strong performance the following year. In fact, average performance in the 12 months that follow cash exceeding all other asset classes have averaged a total return of 15.7%. Even more interesting, there is a 75.9% frequency of those gains actually happening. It does not mean that the market will be 15.7% better in 2019 than it was in 2018, but it does mean that gains we should have realized in 2018 will rollover and be fully transparent in 2019. That is exactly what I predict going forward.

I generally do not like to bog down these postings with lots of numbers that make the readers’ eyes glaze over. However, it is important to understand the fundamentals of investing, something in which the machines have no interest. The major component of valuating whether prices are reasonable is the multiple of current earnings. At the current time, the Dow Jones Industrial Average is selling at a multiple of 13.6 based on 2019 earnings. The Standard and Poor’s index of 500 stocks is trading at 14.5 based on 2019 predicted earnings. Both of those multiples are significantly below the multiples realized over many years of investing.

If you read all of the projections of the eminent disaster that were reflected in the financial news over the last quarter, you would assume that earnings for 2019 would be falling off a cliff. In fact, earnings are actually projected to increase next year, defying those projections that are so often wrong. At the current time, earnings for 2018 are projected to finish out at 156.97 for the S&P 500. Projected earnings for 2019 are currently at 172.10. Simple arithmetic indicates that the Standard and Poor’s corporation is projecting earnings to increase 9.6% in 2019. Certainly, if anyone was forecasting a recession or any type of downturn in the economy, it would be unlikely that this growth in earnings would be realized.

A more normal multiple of earnings over the last 75 years is somewhere between 17 and 18. If you assume the halfway point between those two numbers, which is 17.5 times projected earnings of 172.10, you would be looking at a year-end projection next year of 3,011. If you take the difference between that number and the closing of the S&P 500 on December 31, 2018 at 2,507, you see that the market has the potential to go up 504 points during 2019, simple arithmetic indicates that is a return of 20%. Maybe that is high, but still higher.

Now, is it realistic that the market could go up 20% in 2019? Arithmetic is a set answer, but obviously none of us know what the machines are thinking. If it does go up 20% as projected, I think the more realistic answer would be that this is a two-year return, not a one-year return. Since the machines forced 2018 into a negative year, the rollover of that gain that we should have realized in 2018, along with the gain in 2019, might very well reflect this type of 20% gain in 2019.

Painting of Ava by Stevie Streck, one of our talented clients

Currently, there is a lot being said currently about the worldwide downturn in the economies. Certainly, China is realizing a downturn due to the issues regarding tariffs and internal political issues. If you look at the rest of the world, much has actually improved over the last several years. It has been several years since the emerging markets have been a positive influence for performance. For 2019, I see these emerging market countries will get on firmer economic ground and their stock market performance should improve. I do not see a recession for Europe in 2019, and clearly, China is just at a slowdown and not a recession. If, as I anticipate, the tariff issue is resolved in the first half of 2019 and China uses its economic power to stimulate their own economy, you could see a major upcoming turnaround in Asia. I am very optimistic about the U.S. economy, and in my way of thinking, the world economy will be dragged by the U.S. kicking and screaming. So, I see the 2019 year being extremely profitable in the U.S. and it also looks like the international community could follow. Strictly on a valuation basis, the international markets are cheaper in the United States but as was reflected in 2018, the U.S. financial markets outperform the world markets by a significant percentage.

The most dangerous market in the world might very well be what an average investor might consider the safest. The U.S. Treasury bond market is considered by most to be the safest investment that you could make. Although it is absolutely true that you will get your money back, it is not necessarily true that you can make money on the investment. The most important bond issued by the Federal Reserve is the 10-year Treasury note. On December 31st, that rate closed at 2.686 %, which was one of the lowest rates of the year. Interestingly, as recent as October, the same bond traded at 3.248%, and therefore suffered a significant decline during this 90-day cycle. That type of decline in the benchmark 10-year Treasury is unusual and should be analyzed.

As mentioned above, the machines were heavy sellers during the fourth quarter of 2018. The typical trade would be to sell out of equities and move into Treasury bonds. You saw this occurring during the entire fourth quarter of 2018 when the equity markets moved down and the yield on the 10-year Treasury also moved down. When you have a large demand to buy the bonds, as we had in the fourth quarter, you see the rates move down accordingly. 

What is unusual about this movement of the 10-year Treasury is that the Federal Reserve has actively moved up the federal funds rate throughout 2018 and has indicated a desire to move up twice in 2019. So, the short-term Treasury fund rate is moving up to the mid 2.25% level, when the 10-year Treasury is only yielding 2.686 %. Much has been said this quarter regarding the inverted bond-yield, but my assessment is that this 10-year Treasury is unreasonably low and is likely to move higher. There is no question that the move down in the price of oil has positively impacted inflation for 2019, but in my opinion the price of oil is only temporarily depressed. Therefore, if the 10-year Treasury begins to move higher as I project, many investors relying upon this level of financial security will see heavy losses. I also see that happening in the high-yield bond market, which is vastly overextended, and in other types of investments that rely on interest rates, such as utilities and real estate funds. I am thinking that in 2019 there is a high likelihood of a reversal of rates that would impact all of these asset classes negatively.

You do not have to be a Philadelphia lawyer to realize what occurred in the fourth quarter. A substantial sum of money moved out of equities and into bonds during this quarter. If I am correct and these trades were based upon the quantitative analysis of the machines, the trade is very likely to reverse in 2019 if the market moves higher. It is only common sense that if machines trade on momentum to the downside (as they did in the fourth quarter), there is a high likelihood that the machines will trade to the upside if this movement occurs. In order to exploit that move, they will clearly have to sell bonds to buy equities. While it appears to me that the equity markets are underpriced, I fear the Treasury market might be the real upcoming loser.

From my son, I received the latest book written by John McCain, The Restless Wave, which was written right before his death. I have never been a huge fan of John McCain, and I certainly do not agree with all of his politics, but parts of his book were very interesting. He described in detail the problems in the 2008 election when he ran for President of the United States and the mistakes that were made. It is pretty interesting to hear his reflection on what we on the outside perceived as being total chaos. He also went into detail regarding his sickness, which ultimately led to his death last year.  

The only reason I mention this book is that there is a section on immigration that is worthy of your reading. It is a mystery to me why politicians cannot get this very important subject under control. I recognize the fact that the Democratic Party would prefer that we have open borders, not for any reason that makes sense to me other than it is assumed that such a minority would vote Democratic, and therefore it would be beneficial to their political goals. On the other hand, Republicans are just as obstinate on the subject, refusing to accept the fact that many of the illegal aliens that are living in this country have been here for at least a decade and are hardworking, taxpaying citizens. It is hard to believe that the two parties cannot reconcile these opposite opinions, so we continue to have total chaos on the border where the laws are uniformly ignored and the politics make matters worse.  

For those of you who do not recall history, one of the staunchest Republicans of all time issued a blanket amnesty in 1986. Ronald Reagan realized that it would be impossible to deal with immigration issues since many of the undocumented immigrants had been living in the United States for many years. Even though he supported tough immigration laws, he realized that dealing with the people that were already residing in the United States could only be dealt with where they would register and become citizens based upon several criteria. At that time, it was believed that there were 4 million illegal immigrants living in the United States and roughly 3.2 million of those applied for immigration with various levels of success.  

Today, it is believed that there are 11 to 12 million unregistered immigrants in the United States at the current time. The problem since 1986 is that the enforcement of immigration has basically been a joke. There are certain administrations that have practically ignored the laws, and then there are certain cities that allow for sanctuaries for illegal immigrants, even though they are clearly in this country unlawfully.  

Regardless of how you feel about the matter, at some point, we have to deal with the issue. I thought John McCain had a very reasonable explanation that might actually work. Essentially, it allowed undocumented workers that had already been here for 10 years, that had not committed any crimes, to apply for citizenship, pay back taxes, and basically to get right. There was also a very interesting part about a temporary work permit. Basically, this work permit would allow for a three-year trial period whereas they could work in the United States and be accounted for, but would have to return after three years. I am not exactly sure why this plan did not pass in Congress, but it certainly seems to be a reasonable approach to the immigration issue in America today.

One of the most annoying aspects of immigration to me is that we really do not even attempt to deal with the issue. We all know that there are millions of undocumented workers in America that are hardworking, taxpaying citizens. Of those millions, the number that are criminals and against the American public is a small percentage. It would not be that difficult of a matter to close the borders to future immigration, but dealing with the people that live here would be a monumental feat. What is more baffling than all of that is the inability for Congress to even have a basic discussion on the topic. If you get a chance, read these few chapters on immigration and see if you agree with the policy that is laid out. I am sure the hardliners would say no amnesty under any circumstances and the liberals would offer blanket amnesty. Obviously, the answer is somewhere in between and must be addressed from a system that is fair, yet can administratively be dealt with.  

Despite being a steadfast conservative, even Ronald Reagan realized that a compromise to solve the issue was required. Designing of the immigration amnesty was revolutionary in its concept and application. At least Ronald Reagan had the good sense to compromise on the matter. However, enforcement of the laws is worthless if we do not stop illegal immigration.  

There will always be illegal immigration in this country, as there has been since the beginning of time. It is good, it makes us better and certainly the laws exist that would allow it. What we cannot deal with is open borders where anyone can enter the United States at will, without authorization. Maybe the bill that John McCain proposed would actually accomplish that goal.

I am very optimistic for 2019 – not based on what I expect the machines to do, but rather on the fundamentals. You cannot invest based on the wild fluctuations that the machines bring us. Over time, fundamentals always win, and currently, the fundamentals are quite excellent. While we certainly have no way of knowing what will happen when the machines start to do their thing, as was evident in 2018, we do know that eventually fundamentals will outperform all other types of valuation of future stock prices.

As always, we encourage you to come in and visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email. 

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

Tax Cuts & Jobs Act

As everyone is aware by now, President Trump signed the tax reform package into law last Friday. While the tax bill contains numerous provisions, we wanted to pass along only a few key items to consider for 2017 and 2018 that may affect some or all of our clients. And you only have a few days of 2017 remaining to take advantage of a few key strategies to wrap up this tax year. Here we go!

• In 2018, the estate tax exemption is jumping from $5.6 million to $11.2 million per person. That is a significant hike and can be transferred to your spouse upon death for a collective estate tax exemption of $22.4 million. Get out there and buy those lottery tickets! The annual gift exclusion will be $15,000 per person per recipient in 2018.

• The standard exemption is almost doubling in 2018. For single filers it will be $12,000 (from $6,350) and for married couples filing jointly it has increased to $24,000 (from $12,700). This increased standard deduction will definitely benefit those of you are that are unable to itemize, but even those of you that used to itemize may find that the new standard deduction is higher than your itemized deductions. If you think you will be using the standard deduction in 2018, you likely will want to accelerate your charitable contributions into 2017 to take advantage of that deduction.

• In 2018, Schedule “A” miscellaneous itemized deductions – typically unreimbursed business expenses for W-2 folks, investment management fees, and tax return preparation expenses, including distributions – are not allowable.  Consider pre-paying those business expenses and fees now if you typically receive a deduction for them. Thanks!

• In 2018, Schedule “A” state and local income tax and property tax deductions are limited to $10,000. Therefore, we would encourage all of you to be sure to pay your 4th quarter state estimated tax payments and 2017 property taxes BEFORE the end of 2017. This will at least allow you the benefit of potentially taking advantage of a deduction for these items during 2017. If you still owe Fulton County or City of Atlanta since those property tax bills came out so late this year, pay them now rather than in January.  If you escrow those payments, call your mortgage company and request that they be paid now.

• Mortgage interest deductions are limited to $750,000 of principal residence and second home debt. This debt limit was previously $1,000,000 with a home equity line kicker of $100,000. There is no longer a home equity line kicker. Therefore, if your debt is greater than $750,000, you might consider accelerating a mortgage payment or two into 2017 to take advantage of that interest deduction.

• Several of the seven tax brackets have been lowered for 2018. In that regard, we would recommend deferring business income for the next few days if possible. There is also a very complicated pass-through entity business income deduction that may be beneficial for some of you with flow-through entity income.

• The electric car credit expires at the end of 2017. If you are considering a purchase, you have 4 days to complete the sale!

• 529 accounts can now be used to save for elementary, secondary and higher education. Consider making contributions and having family members make contributions. The amounts that you can withdraw for lower level education are limited, so please discuss with us before doing so. Fund your 529’s now!

• There will be no more exemption allowance in 2018. Some of you had this phased out already and are used to not having this exemption allowance, but those of you with children that did not have this phased out will likely see an increased child tax credit. It will double from $1,000 to $2,000 per child under 17 years of age. And it will be available to more filers as the income threshold to receive the credit has increased for joint filers who make up to $400,000.

• Likely a lot less of you will experience the AMT in 2018 when the exemption amounts and the phaseout thresholds have been increased.

• Accelerated bonus expensing of qualified business property purchases has been expanded to 100% of property placed in service through 2022 on new or used property.

• New C Corporation tax rate is a flat rate of 21% in 2018 and no AMT.  

The above information constitutes a very limited summary of some of the key provisions in the new tax reform bill along with our recommendations for possible key items to make sure you do over the next few days given the changes. Please contact us directly for questions if you feel you have a specific situation that has not been addressed above. We look forward to working with you during 2018 and wish you all a very happy new year!  

Best Regards,
Danielle Van Lear

Really, Why are You So Worried?

It never ceases to amaze me the level of concern that investors get over the slightest bit of short-term economic news. In the 40 years that I have been doing this, I have never really understood why investors get so concerned over an event that will affect the market over weeks or months, when in fact they do not need the money for years and years. Just exactly what difference does it make if the market goes down next week if you do not need the money until a decade from now?  

When I first began in the investment business, the market fell 22% on one day in 1987. On that day, the Dow Jones went from 2202 to roughly 1700, and today it is close to 18,000. If you were to look at a chart from 1980 through 2016, you would note that the 1987 downdraft does not even appear in the graphic. It is just one continuous straight line up. For that 36-year period, the average gain is roughly 9% per year.

Yet, every day I talk with investors who seem to have a great deal of inner conflict about investing for one reason or another. I do my best to try to explain the basics of economics but quite frankly, in most cases, investors who have a preconceived notion cannot be convinced otherwise under any circumstances. Often times, their anxieties are based upon information from tabloid headlines. “The world is coming to an end”, “life as we know it will change”, “social security is bankrupt”, “the U.S. dollar is worthless”, and many more of which I will not bore you. I only wish I could invoke common sense when it comes to analyzing these outrageous tabloids designed to sell an agenda of one sort or another. Hopefully, I can help you to better understand these issues, and therefore invest better going forward.

Before I jump into the fun stuff, I thought I would share a few pictures of Robby and Danielle, two of the partners here at Rollins Group, with their family.

Reid, Robby, Danielle and Caroline

Reid - Age 1

Caroline - Age 2 1/2

The month of August was basically a “nothing” month from an investment standpoint. For the month of August, the Standard & Poor’s index of 500 stocks was up a minuscule 0.1%. However, year to date, it nobly stands at 7.8% and one-year total return at 12.5%. The NASDAQ composite was up a satisfying 1.1% for the month of August and up 5% for the year. It too has a double-digit one-year return at 10.5%. The Dow Jones industrial average was also up 0.1% for the month of August, up 7.5% for the year and up 14.2% for the one-year period. In comparison, the Barclays aggregate bond index was down 0.2% for August, up 5.7% for the year 2016 and also up 5.8% for the one year period ended August 31, 2016. While certainly not outstanding returns, given the historic bad performances of the month of August, I would have to consider the fact we did not lose any ground as a positive.

As many of you know, the ideal time for investing in the stock market is the period of November through May of the following year. So far in 2016, we have had a very satisfactory year from an investment standpoint, and yet we still have the best time of the year to look forward to. Therefore, I thought I would just cover a few subjects that seem to perplex every one when it comes to investing.

There is no question that the economy slowed down during the month of August, and therefore it is creating some level of concern among investors. If you were to exercise even the slightest bit of common sense, you could easily explain this phenomenon. Given that virtually all schools are back in session prior to the end of August, would it not seem reasonable that there were a lot of people not working during the month of August for vacation and family reasons. Look at Europe, hardly anyone works in August. The fact that business slowed during the popular vacation month of August should come to absolutely no one’s surprise; however, it seems to always do so.  

You may remember that during the month of February, the market sold off ten percent under the presumption that the slow economy meant a recession was surely around the corner. As I explained at that time, the economy is always slows in the winter, for reasons that are so obvious that I do not even need to repeat them. Contrary to the belief of the many investors who sold off, the economists did not know what they were talking about. And, of course, the market bounced back quickly and the dire reports of a slow economy were once again an error in judgment as they did not even bother to consider the time frame at which it actually went down.  

I guess you also remember that the market dropped another 10% when Brexit was announced. Do you remember how you read those headlines about how surely Europe would be transformed and the world as we know it would change going forward? As I explained at that time, Brexit would not even come into play for another several years. Here we are now, some five months after the Brexit vote, and absolutely nothing of any kind has taken place. As I have pointed out before, the British may be one of the most methodical and slow-moving democracies of all time. Do not expect anything to happen in this regard for many years to come. Even with those absolute crystal clear facts, investors still became concerned and sold. Once again, the market quickly recovered and went up even further. Wrong again!

I often quote the famous investor Peter Lynch of the Fidelity Magellan Fund. “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has ever been lost in corrections themselves.” How good of an example of that fact do we have today? Yes, it is true the market crashed in 2008. However, in the last 14 years, the S&P has been up 13 years and yet everyone is trying to gain an advantage and trade for the ultimate market crash. A 93% win rate seems pretty good to me, yet some investors still do not seem satisfied.

I wish many investors would just use facts. Sometimes, “intuitive” knowledge leads to incorrect decisions. For example, every single day over $1 billion in new money is invested in stock market investments through 401(k) plans. This money comes in consistently, regardless of market conditions. Yes, it is true there is money also going out. If nothing else, this new money buying investments alone supports the market and puts the floor on the downside. Yes, it is true that traders would like to scare you out of your positions, but believe me, they are much more scared of this flood of new money coming in than they are concerned about market volatility, since it affects their livelihood. 

While we hear negative publicity every day about an economy that is stalled, did you realize that for the month of July, the savings rate in the United States was up a sterling 21.28% year-over-year. Let me emphasize that again: we are talking about a savings rate in a country, which historically has not saved enough. It would seem to be relatively obvious that savings rates would not be going up if employment was not secure and people did not have excess money to spend.  

The empirical evidence on the subject is everywhere. Automobile car sales are up gigantically over the last few years. Building contracts continue to soar, new housing starts are dramatically higher and residential spending continues to set new records. Given the now famous S&P Case– Schiller index of home prices is up 4.28% over the last year. If you have a calculator, just calculate the value of every home in the United States, multiplied by 104% year-over-year. As wealth is built through the stock market, homeownership and job security, Americans are able spend more money on cars, homes, vacations and everything else in between.

Now let us look at the numbers regarding employment. 2.5 million Americans are working today that were not working one year ago. Yes, it is true that the participation rate is low at 60%, but I suspect a lot of those not working are doing so because they do not have a need to work due to other financial reasons. However, every working American creates a group of people (spouses, children, relatives) who are supported by their work. If you do not believe that 2.5 million new Americans working over the last year who were not previously working does not increase the economy and GDP, then you really do not understand basic arithmetic. Consumer spending is at an all-time high – have you heard that lately?

Okay, let us assume that you are the cynic and that unemployment at 4.9% is not correct, but rather the U-6 unemployment calculation of 9.7%. As you know the U-6 unemployment takes into play part-time people and people that cannot work full-time for one reason or another. Over the last one-year period, that ratio was down a sterling 5.83%, and therefore even that negative unemployment report is improving. People are working which helps the economy.

The fear is that the Federal Reserve will increase interest rates thus throwing the economy into recession, and therefore creating a negative economy going forward. Too often I watch the financial news and shake my head in bewilderment at some of the statements they relay. Let us really take into perspective exactly that particular point and consider the ramifications. First off, interest rates are at a historic low, and have been for years. Any rate increase would still be below the previous historic low, and therefore does not really make any difference to stock prices anyway.

Also, I need to point out again that in Europe, especially in Germany, we already have negative interest rates. Currently, if you loan money to the German government, at the end of 10 years, you actually get back less than you originally loaned. And if you think that is an isolated example, one of the largest economies in the world, Japan, has exactly the same negative rate of return. Maybe you did not realize it, but this week in Europe, major corporations were issuing bonds to investors with negative interest rates. Not governments, but regular corporations. These companies are so incredibly secure financially that they can get people to basically loan them money for free. Does that sound like an environment in which the U.S. could increase interest rates?

What happens if the U.S. increases interest rates in the face of these economic sectors that create negative rates? First and foremost, the dollar would go up and international currencies would go down. That creates an economic boom for the overseas economies in that they have a more competitive dollar to sell goods in the United States. It also creates a negative in the United States in that the dollar strengthens and therefore we could not compete in international economies due to the higher dollar. Really, why would our Federal Reserve ever want to create a situation where they would make U.S. manufacturers less competitive?

It is very important that you understand the double mandate of the Federal Reserve in order to understand interest rates. The Federal Reserve was created basically to avoid inflation. In recent years, they have received a lot of publicity regarding the double mandate of low inflation and full employment. Although the financial news criticizes them for trying to manipulate the economy, you have to evaluate whether they have been successful or not. Currently, the unemployment rate is 4.9% which by all definition is full employment. Have you actually looked at inflation lately? Right now, the producer price index over the last 12 months is down (2.49%). The rate of inflation today is 0.8%, which is less than 1%. Based on that double mandate, the Federal Reserve has its full employment and low inflation. Therefore, there is no reasonable cause for an increase in interest rates, and due to the international constraints of lower rates, you may rest assured any rate increase would be small and not detrimental to the economy.  

So once again, I sit here today trying to understand the philosophy of investors. Yes, I want to be tolerant and receptive to investors’ ideas but I also want to be realistic. I want to sit back and evaluate the economy and try to figure out, based upon what I know and see, whether the economy is good or bad. Perhaps you have not seen the acceleration of home prices that is occurring throughout the United States. Try to get a contractor to do work at your house at the current time. Why are the skies full of cranes building commercial real estate? Try to get a reservation at one of the finer restaurants anywhere.

It does not take an economist of special knowledge to notice that supply and demand is pushing the economy forward. Consumers have money to spend and they are spending it on things that increase the economy. The Atlanta Federal Reserve puts out one of the most respected GDP forecasts in the United States. Today, they are forecasting that the third quarter ended September 30, 2016 will have a GDP growth of 3.5%. We know that interest rates should remain low for years to come. Going forward, for the higher GDP and lower interest rates, corporate profits will continue to rise. As I write this September posting, we have a trifecta of good news: higher profits, better economy and low interest rates. I am absolutely sure that I have no idea what is going to happen in the market next week, next month or next quarter, however, with a high degree of confidence, I can assure you that ten years from now, when you need your money, the market will trade dramatically higher than it is trading today.  

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins